Proportionate liability 'essential' for audit reform

PROPORTIONATE LIABILITY must be introduced if the audit industry is to respond to calls for reform, ACCA has claimed.

The institute’s new study, Audit reform: aligning risk with responsibility, calls on the government to consider instigating a system of proportionate liability, whereby auditors are answerable only for the damages directly caused by their own actions or negligence.

This is in contrast to the current system of joint and several liability, where a client harmed by the actions of multiple parties can pick one or more for litigation, often resulting in deep-pocketed auditors bearing the full burden of damages.

ACCA head of technical John Davies said there is widespread acceptance of the need for auditors to expand their role, arguing liability reform is essential if firms are to take on more responsibility.

Proportionate liability could also boost competition in the market by creating a safe space for smaller firms to compete with major peers. This was a key recommendation of the House of Lords report on audit, which found too much concentration at the top of the market and little room for mid-tier firms to engage.

“The reform agenda, which we support, needs to recognise this risk of exposing auditors to unreasonable levels of liability and prohibitive insurance costs,” said Davies.

In principle, clients and auditors can contractually agree limitations on the auditor’s liability, but in reality this option has been little used, and certainly not among the largest listed companies.

Australia has recently introduced the “more radical” option of proportionate liability; Davies said this is preferable to alternatives such as statutory liability caps, as these “break the responsibility link” and would be unfair to wronged clients.

The government has until now been conservative when it comes to attaching liability to auditors, saying the purpose of their report is to advise the body of shareholders on company stewardship, empowering them to influence the board of directors.

This is as opposed to audit’s purpose being advice to individual shareholders or outside observers, which could leave firms vulnerable to claims for damages.

If the role of audit expands, it could be considered as having direct relevance to the buying and selling of shares, opening up new legal arguments about where auditors’ duty of care lies and how far it extends.

Davies concluded: “It’s in everyone’s interest to see audit strengthened. Stakeholders say they want a wider remit and, in principle, auditors are ready to accept it. Liability reform must be seen as a necessary tool to help make this happen.”